So, the Motown millionaire’s beggars’ banquet blew town, retreating from Washington’s corridors of power to their Detroit lairs to lick their wounds. To say the CEOs of Chrysler, Ford and GM were unsuccessful in their televised attempts to “liberate” $25b from the Troubled Asset Recovery Program would be like saying the Detroit Lions are struggling to get to the Superbowl. In many ways, it was over before it started. The CEOs arrived woefully unprepared, and left with admonishments to return next month after, how do I put this delicately, getting their shit together. House Speaker Nancy Pelosi and Senate Leader Harry Reid switched into CYA mode. As part of their campaign, they’ve written a letter to Detoit, telling that what needs doing the second time ’round. Having secured a copy of this missive, TTAC contacted our own Ken Elias to read between the lines on your behalf. As the automakers run out of cash, it all comes down to this.
November 21, 2008
Dear Messrs Wagoner, Mulally, and Nardelli:
Ronnie G. – You have no standing at the table. Get lost. You should have killed the JOBS bank years ago. Yea, we love your union dollars but you’d vote for us anyways.
We recognize the importance of the domestic automobile industry and are committed to working with you to ensure its viability in the years to come. One in 10 American jobs is related to auto manufacturing; our national security depends on the industry’s technologies and manufacturing capacity; and our competitiveness in a global economy depends on its pursuit of excellence.
Boiler plate mostly, just shows that Congress does care…kind of.
As you know, Congress has provided President Bush, the Chairman of the Federal Reserve, and the Treasury Department the authority they need under the Emergency Economic Stabilization Act (EESA) as well as other authorities to provide short-term financial assistance to the auto companies.
If Bush was your friend, you might have convinced him. But he didn’t act, thank god. That would have been truly stupid to give your companies money with no strings. See below. You’ll have to stick with the Dems now, and we’re going to prove to the public that we aren’t just “tax and spend” liberals. There’s a new sheriff in town boys.
Unfortunately, the Bush Administration and the Federal Reserve have thus far declined to use their powers to improve our nation’s financial stability by assisting the auto industry. Notwithstanding existing authorities, this Congress is prepared to consider additional legislation that would give the assistance you seek, provided that you submit a credible restructuring plan that results in a viable industry, with quality jobs, and economic opportunity for the 21st century while protecting taxpayer investments.
Dems will take credit, not Bush. Just another chance for us to stab Bush. God I hate that man! We’ll blame him for not funding you guys…although it’s clear from this letter that you flunked the test we gave you in your first go around at the well. It took a lot of chutzpah to come in Gulfstream jets and ask for money.
In order for Congress to act in a timely manner, this plan must be presented to Congress by December 2nd, specifically to Senate Banking Committee Chairman Christopher Dodd and Financial Services Committee Chairman Barney Frank.
These Committees already grilled you. Think it’s gonna’ be any easier this time?
It is critical that you meet this deadline since we have announced we are prepared to come back into session the week of December 8 to consider legislation to assist your industry. We intend to give pertinent agencies within the executive branch, the Government Accountability Office, the Board of Governors of the Federal Reserve, as well as outside experts, the opportunity to comment on your work.
Yea, we’re going to get other people involved in reviewing your plans. Like folks who can read an income statement and balance sheet. And the big question is “who are these outside experts?” You don’t want to know since none of them will have ever been on your payrolls.
The plan must:
• Provide a forthright, documented assessment of the auto companies’ current operating cash position, short-term liquidity needs to continue operations as a going-concern, and how they will meet the financing needs associated with the plan to ensure the companies’ long-term viability as they retool for the future;
You’re going to give us a current cash balance as of November 30th and tell us in plain English how much cash you need to keep the lights on. That’s all the money you’re going to get. And I know that none of you can get additional financing for a turn around. So either get your lenders and everyone else who you owe money take a lot less cash, or else file for bankruptcy. Yea, that’s right. Even though I said that’s a last resort, well, it is.
provide varying estimates of the terms of the loan requested with varying assumptions including that of automobile sales at current rates, at slightly improved rates, and at worse rates;
Don’t show Congress a plan based on a wing and a prayer of some “normalized” sales rate. This economy isn’t turning around any time soon. And smart people, like TTAC, have told my aids that you can’t possibly become profitable at 11MM SAAR. So do what you need to do…no matter how much it hurts. Hey Bob Nardelli – I remember what you did to those workers at Home Depot, cutting their wages while enriching yourself. And you thought I forgot!
• Provide for specific measures designed to ensure transparency and accountability, including regular reporting to, and information-sharing with, any federal government oversight mechanisms established to safeguard taxpayer investments;
No more hiding for Cerberus. And since the taxpayers are the public, you’re going to have to show the world that you’re really not the smartest guys in the room. Heck, we’re squeezing you so tight that you might have to liquidate Chrysler.
protect taxpayers by granting the most senior status for any government loans provided, ensuring that taxpayers get paid back first;
The only way to do this is to get approval from your senior lenders. For them to allow this, they’ll want a plan that works too. But if you’re going to ask for subordination from your lenders, you might as well ask them for a debt for equity exchange. This is your opening for the cram down. Don’t blow it now.
• Assure that taxpayers benefit as corporate conditions improve and shareholder value increases through the provision of warrants or other mechanisms;
Dilution to current shareholders for sure.
• Bar the payment of dividends and excessive executive compensation, including bonuses and golden parachutes by companies receiving taxpayer assistance;
Limit CEO compensation at $1MM/year. And Rick you should probably quit now, your arrogance in front of the committees was just too much to bear. Asking a Senator if he could guarantee when the economy would come back…what balls! I’m giving you a chance to take that parachute today. Just go away. Nardelli, you agreed to a dollar salary, so just do it. I feel bad for Mulally, he made a deal to leave Boeing, and he’s probably worth the money having inherited a mess he’s been asked to clean up. But the public will insist on a salary cap – so do it.
include proposals to address the payment of health care and pension obligations;
That’s right, the UAW needs a cram down too on the VEBA. Learn to live with the same benefits everyone else gets (except us of course). And we want those pension obligations funded out of current operating cash flow – don’t show us a plan where taxpayer dollars fund those obligations.
• Demonstrate the auto companies’ ability to achieve the fuel efficiency requirements set forth in the Energy Independence and Security Act of 2007, and become a long-term global leader in the production of energy-efficient advanced technology vehicles; and
The Greens are holding you accountable to your promises. I’m also telling you that the funding mechanism will be out of the Energy Department funds we already appropriated – which means a limit of $25 billion total to be put out by the government. The Republicans won’t challenge us too much as there’s no new money involved. And if that’s not enough dough for GM or Chrysler to have a go forward plan, then you need to figure something else out.
require that government loans be immediately callable if long-term plan benchmarks are not met.
It means the government can force a bk any time it wants. Get over it.
The auto companies’ shareholders, business partners, and prospective benefactors—the American people—deserve to see a plan that is accountable to taxpayers and that is viable for the long-term. In return for their additional burden, taxpayers also deserve to see top automobile executives making significant sacrifices and major changes to their way of doing business.
Yo’ Rick W. Wake up…that means you. Change your business in a big way now.
The auto companies’ shareholders, business partners, and prospective benefactors—the American people—deserve to see a plan that is accountable to taxpayers and that is viable for the long-term. In return for their additional burden, taxpayers also deserve to see top automobile executives making significant sacrifices and major changes to their way of doing business.
Get it now? Sacrifices. Major changes in how you do business – like restructure now. This will force the cramdown at GM and it might just liquidate Chrysler. It’s what needs to happen, and most of the public will think we did the right thing and not blow their money. Ford – you sure you can really make it as you’re capitalized today? You better have a good case.
We look forward to working with you to ensure a viable American automobile manufacturing sector for decades to come. If we are successful, we can ensure a brighter future for the automobile industry, our nation, and our planet.
Now having read this letter, if you can’t see Obama’s hands in this, then you’re really stupid. Don’t think the Messiah will treat you any better – because THIS IS HIS PLAN!
Thank you for your prompt attention to this matter.
Prompt means by December 2nd, don’t stall. I really don’t want to call Congress back but I’m willing to do it IF I see you made some really big changes – and got your creditors and the UAW to contribute. Capiche?
Sincerely,
Nancy Pelosi Harry Reid
Speaker of the House Senate Majority Leader
Senator Dodd toured the Hartford CT auto show yesterday, full contingent of dealers in tow. Naturally I had to run right over to hear what was going on. Dodd was asking lots of questions about how dealer’s finances work, how they work with the banks and how they pay and get paid by the automakers. All the dealers – seemed like mostly GM dealers were squawking like crazy about how bad it is, how banks are dropping their floorplans, how GM is withholding incentive reimbursement etc. They all sounded really panicked about their situations.
Dodd was under the assumption that most of the domestic dealers had hedged their bets with an import point, but it seemed like the dealers that were there were strictly domestic only points.
Obviously Dodd was out grandstanding, but hopefully he learned something so he can ask intelligent questions at the next hearing.
How could congress possibly blame the president or the Fed for not spending money? It is the constitutional monopoly of only congress to spend money. The President does not get money unless congress first authorizes it. Congress can control the Fed.
In fact, Pelosi and Reid’s congress is the fundamental authorizer of spending. It is they themselves who chose not to give money to Detroit.
Here is the simple fact: cars cost too much.
The high price of cars was subsidized and in fact fostered by easy credit. Easy credit resulted in house price bubbles and college tuition bubbles and car price bubbles. It enabled the huge margins carmakers enjoyed on SUVs, which cost a few hundred more to make but sold for tens of thousands more.
The credit bubble is history, and now house prices are deflating. In fact, everything is deflating, or soon will.
But carmakers think they have the power to set car prices. They do not. The market sets them.
The market is saying this is too high and you need to cut or no one will buy any. Whichever company executive is a true businessman and not a jackass will see this and will cut prices first. They have no choice, and I’m not saying it will be without consequence.
Consumers can not buy a new car a lot longer than automakers can not sell any.
What Pelosi and Frank and Dodd are trying to do is to allow automakers to keep car prices high in a doomed attempt to centrally control the market. It is part of the war on the middle class, and will continue in the new administration.
Wow.. If we have to nationalize all big businesses in the US, might as well have quidelines.
Where I lose all of this new business model stuff is when we leave the la la land of selling the jets and holding down compensation for execs,where are the real savings that these auto makers need?
We all know it is killing dealers, brands, and cutting the UAW is where these savings have to come from. In the case of Chrysler, it means killing Chrysler, and selling the couple of viable brands like jeep & minivans.
This means war at the OK corral. The dealers will certainly sue in 50 different State courts which might take all of the governments money to the big three to defend the suits (and years of time).
Secondly, the UAW has said we are not reopening our contracts to scale back terms. This means either a strike and or further litigation. Only a bankruptcy gets these Detroit companies over these two giant hurdles.
Or can Congress find a third way to accomplish this?
Dodd was asking lots of questions about how dealer’s finances work, how they work with the banks and how they pay and get paid by the automakers.
I would hope that as this saga plays out in the coming weeks that the B&B keep foremost in their minds the following: As clueless as Wagoner et al appeared before the House and Senate committees, they are all paragons of business knowledge as compared to the typical congressman.
Some, such as Barney Frank, have a little more economic savvy than the rest, but when it comes to the nitty gritty of the auto business, they are clueless.
In short, please do not take seriously their critiques and criticisms of Detroit. Agenda #1 is self-aggrandizement for about 90% of these ladies and gentlemen. The fact that Pelosi is willing to involve the Federal Reserve, GAO, and others is really quite extraordinary, it seems to me, and quite out of character.
Regarding the dealers “squawking” at Sen. Dodd, why should we the taxpayers bail out the dealers? They are in business, either they make money or they don’t, you take risks, sometimes you win, sometimes you lose. The hitch their wagons to dying horses, not we are supposed to provide new horses to pull them?
I wonder howmany of these dealers screwed customers with “rust protection”; “fabric guarding”; overpriced alarm systems, etc.?
The only thing worse than crooked used car salesmen are politicians. Hypocrisy is their only stock in trade, so they know all those words. This letter creates the perfect Catch 22.
Working with you? Why say that? Why not be honest for a change and just say “No”?
The Plan demanded in terms of short term assurances and solutions has nothing to do with the reality of the situation for all three Detroit auto makers if they remain as going concerns outside bankruptcy. So unless all this is a jointly pre-organized con game being set up to dupe the taxpayers in December, as the money could only be given out in contradiction to the literal requirements in this letter, then the letter is in fact saying “No, we will not work with you”. Period.
The dealers will certainly sue in 50 different State courts which might take all of the governments money to the big three to defend the suits (and years of time).
Do the dealers have the right to demand that the manufacturer provide them with product if the dealer is not producing that product?
The answer to the dealer lawsuits (say a Pontiac dealer) just stop producing Pontiacs. If GM produced their products only under the Chevrolet name (almost all GM products are Badge engineered anyway) wouldn’t that be a way to eliminate Buick, Pontiac, Cadillac and GM dealers?
You can hear the vise tightening on this one. I agree cars cost too much, considering the values drop immediately after you drive it off the lot. I also agree credit made this possible, much the same way easy outside money made college and healthcare so expensive too.
This is all a form of subsidy and it needs to stop. We all take advantage of it to some degree, others live their lives around credit. Some companies live this way too.
Dead on about blaming Bush&Co for the delay, the only thorn in this plan is the timing. If they were looking for money by Feb20th or later this would be a different situation. They would hold hearings the end of January and cut the check.
Next up will be airlines, appliance makers, clothing industry, you name it.
Here is the simple fact: cars cost too much.
Amen to that. Cars have way too much content, especially overpriced electronics. All I want is a reliable engine, brakes, and maybe some sound deadening and possibly a radio. I don’t need an entertainment center, I’m driving. As for the kids, whatever happened to “Don’t make me stop this car!”
Excellent deconstruction Ken. It should be mandatory reading for all of the major players. There are no options going forward, this is it. I can’t believe how much squirming the execs are doing, the real pain will be felt by dealers and workers.
It’s extremely counterproductive thinking, but I cannot help desiring some major punitive actions against senior management. Perhaps they could spend their golden parachutes and retirements in the courts, because they clearly have some “esplaining” to do.
Alan Mulally is exempted from contempt, of course. He represents both the hope for a renewed domestic industry, and a template for the path out of the wilderness. He is also the justification for saving Detroit. Once gone, a domestic industry is unlikely to emerge again. Better managed, there is no reason why Detroit can’t be the envy of the world in a decade, no matter how personal transportation evolves in the meantime.
Again Ken, let’s hope your interpretation is widely disseminated.
Well done, Ken. Kudos also to Pelosi & Reid. The easy thing to do would have been to compromise on the source of the $25 billion, authorize it, and get out of Dodge for the holidays. From watching the CEOs, there must have been a consensus among the congressional leaders that unless they got through the denial that was still ruling the day in Detroit, it would be $25 billion thrown away for no good purpose.
It also shows that at least some in both chambers understand that the best thing to do (at least for GM) is to provide Chapter 11 debtor-in-possession financing. Less clear is how well they understand that Chrysler is terminal and what to do with Ford if GM gets relieved of obligations through Chapter 11.
Excellent piece, Ken.
I must say I’m really looking forward to these plans.
I don’t see any reason America won’t have an auto industry if Detroit fails. There are many smaller companies that were rising last summer while fuel prices were high. Without Detroit to compete with they’ll probably move ahead quickly. Would be interesting to see what other import manufacturers would choose to do business here if the big 2.8 were gone.
For the record I don’t want Detroit to disappear – just want them to change their game so they can excel.